The World Trade Organization

Plan
What is the WTO?

Regional Trade Arrangements

Prospects for opening free trade

All markets rest on political structures

Trade?
GATT/WTO
 GATT/WTO
General Agreement on Tariffs and Trade became the World Trade
Organization in 1995

GATT: 1947-1994

Initial idea: International Trade Organization (ITO discussed at

Bretton Woods)

But the ITO failed

Charter drafted 1948
United States Congress failed to approve it

Meantime, GATT had been initially formed with 15 countries grew

from there.

On 1 January, 1948 the GATT was signed by 23 countries

 WTO
153 members as of 2008
http://www.wto.org/english/theWTO_e/whatis_e/tif_e/org6_e.htm
Staff of only 635
IMF: ~2000
World Bank: >10,000
2009 Budget: CHF 189,257,600 ~ $170-175 million
http://www.wto.org/english/thewto_e/secre_e/budget09_e.htm
World Bank operating budget ~ $1 billion
Total IMF resources >300 billion
Derives most of its income from contributions by its members (size
established according to a formula based on share of international trade)
http://www.wto.org/english/thewto_e/secre_e/contrib07_e.htm
(Detail: share of international trade (%), based on trade in goods, services
and intellectual property rights for the last five years for which data are
available. There is a minimum contribution of 0.015%)
 Initial GATT members (1/1/1948)
Australia, Belgium, Brazil, Burma, Canada,
Ceylon, Chile, China, Cuba, the
Czechoslovak Republic, France, India,
Lebanon, Luxembourg, Netherlands, New
Zealand, Norway, Pakistan, Southern
Rhodesia, Syria, South Africa, the United
Kingdom, and the United States
The WTO
 What does the WTO do?
Administers trade agreements

Provides a forum for negotiations

Provides a dispute settlement mechanism

 3 components
1. A set of principles and rules

2. An intergovernmental bargaining process

3. A dispute settlement mechanism

 (1) Principles & Rules
1. Market liberalism
In the aggregate gains from trade outweigh losses
Winners could compensate losers

2. Nondiscrimination
Most Favored Nation (MFN): Treat all countries as
well as its favorite trading partner
National treatment: prohibits the use of taxes,
regulations, other domestic policies to advantage
domestic over foreign firms
 Article I: Most Favored Nation
(MFN)
Article I
General Most-Favoured Nation Treatment
1. With respect to customs duties and charges of any kind imposed
on or in connection with importation or exportation or imposed on the
international transfer of payments for imports or exports, and with respect
to the method of levying such duties and charges, and with respect to all
rules and formalities in connection with importation and exportation, and
with respect to all matters referred to in paragraphs 2 and 4 of Article III,*
any advantage, favour, privilege or immunity granted by any
contracting party to any product originating in or destined for any
other country shall be accorded immediately and unconditionally to
the like product originating in or destined for the territories of all
other contracting parties.

Source: World Trade Organization, Legal Texts

 MFN exceptions
Regional trade arrangements
Free-trade area (NAFTA) or a customs union (EU)

Generalized System of Preferences (from 1960s):

Developed countries can apply lower tariffs for
developing countries than for their peers
 Article III*
Article III: National Treatment
National Treatment on Internal Taxation and Regulation

1. The contracting parties recognize that internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal
sale, offering for sale, purchase, transportation, distribution or use of
products, and internal quantitative regulations requiring the mixture,
processing or use of products in specified amounts or proportions, should
not be applied to imported or domestic products so as to afford
protection to domestic production.*

2. The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess of
those applied, directly or indirectly, to like domestic products. Moreover, no
contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.*

Source: World Trade Organization, Legal Texts

(2) Intergovernmental Bargaining Process

Bargain over what?

Tariffs and nontariff barriers
Nontariff barriers? Health & safety regulations, standards
(environmental), government purchasing practices, quotas,
bans, rules of origin, packaging/labeling conditions, complex
regulatory environment, licensing

Antidumping
Intellectual property rights
Textiles, agriculture, services, government procurement,
e-commerce
 9 Bargaining Rounds
1947 Geneva
1949 Annecy
1951 Torquay
1956 Geneva
1960-61 Dillon Round
1964-67 Kennedy Round
197379 Tokyo Round
1986-93 Uruguay Round
2002-??? The Doha Round
http://www.wto.org/english/thewto_e/minist_e/min98_e/slide_e/slideshow_index.htm
What is Doha Trying to Get Done?

Getting a deal done: agriculture for non-

agricultural market access (NAMA)
Rich countries are increasingly voicing
demand for services, as per Singapore
agenda
http://www.youtube.com/watch?v=03GU14
F2Zb0 (10 minutes)
 (3) Dispute Settlement Mechanism
The dispute settlement mechanism
ensures compliance by helping
governments resolve disputes and by
authorizing punishment in the event of
noncompliance. (Oatley txtbook, p25)

How do you tie your hands with out a rope?

(commitment/enforcement questions)
COSTS OF ESCALATION
 Dispute Settlement: GATT vs. WTO

Under GATT, a defendant could block actions.

Under the WTO, this cannot happen
GATT
WTO

Requestforfor
Request Request for
Request Panel Appellate
Panel Ruling
Consultations
Consultation for Panel Panel Ruling Body

Compliance Arbitration
Retaliation
Panel Panel
 Concessions and Legal Escalation
80 80

70 61% of all 70
instances of
full
Probability Defendant Concedes

60 concessions Panel Established, 60

under WTO No Ruling
50
occur prior to 50
ruling
Ruling for
40 40
Complainant

30
Consultations 30

20 20

10 Ruling for 10

Defendant
0 0

Stage Dispute Reaches

Source: Busch and Reinhardt 2000

 Full Concessions Under GATT/WTO
Busch & Reinhardt. Developing Countries and GATT/WTO Dispute
Settlement. Journal of World Trade 37 (4) 2003: 719-735.
100

90

80 .63-.78
WTO
Prob (Full Concessions)

70 Developed
.41-.64
60

WTO Developing
50

40 GATT Developed
GATT Developing

30

20 .33-.48
.27-.49
10

Complainant Status by Period

NOTE: Displays predicted probabilities from Model 1, holding all other variables at their sample means, moving WTO from
0 to 1 and Complainant's Per Capita Income from its 10th percentile value ($2,152) to its 90th ($29,251), with 90 percent
confidence intervals
 The WTO Effect
While the rich are doing better than the poor
going from GATT to WTO (as complainants)
This is NOT because the rich win more often or
get more compliance ex post.
Rather, it is because rich countries settle more in
advance of a ruling.
Remember, the DV is concessions, not wins
The effect of the WTO is through deterrence
Regional trade agreements
 RTAs
Free Trade Area (e.g., NAFTA)
Eliminate tariffs amongst members
Members maintain independent trade policies with non-members
Customs union (e.g., EU)
Eliminate tariffs amongst members
Common tariff policy with non-members
Discriminatory?
Allowed under GATT Article XXIV as long as tariffs are no higher
than the level applied by (ALL***) countries prior to the arrangement
(MERCOSUR led Argentina to raise tariffs on non-members but
not above the level of the highest MERCOSUR member)
Currently 190-250 RTAs in operation (up to 400 on the horizon for 2010)
More than half are bilateral (e.g., KORUS)
Most are free trade agreements
 Customs Unions
Central American Common Market (CACM)
Andean Community (CAN)
Caribbean Community (CARICOM)
Economic and Monetary Community of Central Africa (CEMAC)
East African Community (EAC)
Eurasian Economic Community (EAEC)
European Economic Area (EEA) (plus EC Andorra, EC Turkey)
Gulf Cooperation Council (GCC)
Southern Common Market (MERCOSUR)
Southern African Customs Union (SACU)
West African Economic and Monetary Union (WAEMU)
 Why RTAs not the WTO?
Sign with particularly important markets

New forums Forum shopping! (Busch)

Why would you go to NAFTA?
Why would you go to NAFTA?
 Choose the forum that best suits you!

NB:
In the absence of the regional option, you
may prefer no litigation at all!

By moving a lil bit toward free trade under

NAFTA
Anti-trade interest groups may weaken
Eventually get to WTO position?
Richardson Hypothesis?
 Creation or diversion?
Should we stick to the WTO or rely on RTAs if
we want to increase global trade?
Trade creation: RTAs lowers tariffs amongst
members, who trade more amongst themselves
Trade diversion: RTAs lead members to
abandon non-member partners
The impact of the RTA on trade is the difference
Oatley: No one knows the answer
 Richardson hypothesis
Richardson [J. Intern. Econ. 34 (1993) 39] boldly predicts that trade
diversion (and trade creation) may actually cause tariffs to decline!
The hypothesis is fundamentally attributable to the presence of a
political component in the governments' objective functions.
Evidence? Bohara, Alok K., Kishore Gawande and Pablo
Sanguinetti. 2004. Trade Diversion and Declining Tariffs: Evidence
from Mercosur. Journal of International Economics 64(1): 65-88.
This study employs data on Argentinian tariffs before and after
Mercosur
Argentina was smaller than Brazil, many of its industries faced the
possibility of decline due to free trade with Brazil, a country twice its
size in total output
Result: CONFIRMS RICHARDSON HYPOTHESIS!!!
 Take-home points
WTO is a small international organization
Purposes: Provide a negotiation forum, administer trade
agreements, provide a dispute settlement mechanism
Chief principles: MFN, Nondiscrimination
Major negotiation issues: tariffs, nontariff barriers,
antidumping, intellectual property rights, textiles,
agriculture, services
Regarding disputes - most are settled before full escalation
So the WTO does not cast many rulings - but it still may
have a big effect as a deterrent!
Regional trade agreements - FTAs and Customs Unions
Forum shopping
Richardson Hypothesis
 Thank you
WE ARE GLOBAL GEORGETOWN!